Bengaluru Gets It Right - Land Value Tax To Finance The Metro

This is an interesting little example of good public policy--Bengaluru is using a variation of land value taxation to fund the construction of a metro station. The basic insight being that the construction of a metro line adds value in the areas served by it. Thus a reasonable method of financing the construction is by trying to capture some of that rise in the land value. The value rise is largest at the actual stations of course, so that's the right place to try to be charging the owners for the uplift in land values.

The Embassy Group will develop the Kadubeesanahalli Metro station, which figures in the new 17-km KR Puram-Silk Board Metro line, at a cost of `100 crore. An MoU was inked on Friday between the Embassy Group and the Bangalore Metro Rail Coporation Ltd, said a release.

“This is the first corporate to sign an agreement under the Public-Private Partnership,” the release said.

That station, once built, will be a valuable place to have stores, advertising and so on:

BMRCL for the first time, came up with innovative funding for this line—which means that funds can be mobilized by monetizing land around stations, giving exclusive advertising rights to third parties etc. BMRCL had identified and invited private entities and companies to sponsor up to 25% of the total project cost with an intention to congregate funds as well as get corporates to participate in faster funding and completion of transportation projects.

This is not a complete solution to the costs of building either the station or the line but it is a very useful, and economically correct, manner of gaining access to at least some of the funds required:

The period of concession and permission granted to Embassy Group will be for a period of 30 years starting from the date of commencement of commercial operations and could be extended further on mutual terms.

What you would really like to be able to do is capture some of the rise in land values in the hinterland of the station. That however is complex and cannot be done perfectly. So, this is at least a good start.

It's worth noting that the extension of London's Tube to Battersea is being largely financed in this manner. The people redeveloping the Battersea Power Station have chipped in a couple of hundred million to extend the line. On the grounds that the extension produces more than that value uplift to their development. The earlier extension of the Jubilee Line out to Canary Wharf was also paid for, largely, by the developers of Canary Wharf. On exactly the same grounds. And Hong Kong's metro system almost entirely finances its capital development budget by such capture of land value changes. That though is a little different as much of the freehold of the land is government owned anyway, so it's easier to charge that uplift to lessors.

Bengaluru has at least the beginnings of a good solid policy here. A metro station uplifts the value of the local land so why not capture some of that rise in value to pay for the station itself?